Thursday, June 13, 2013

As the housing recovery gains momentum, one encouraging sign
has been the strong return of multifamily construction. According to the Census
Bureau’s Survey of Construction and Building Permits Survey, construction on 245,300 multifamily units was started in
2012, the most since 2008. (Figure 1) The
surge in construction activity is only beginning to result in new supply on the
market given the long lags from the time a project is conceived until
construction is completed (only 166,000 units in multifamily buildings were
completed in 2012, just slightly above the low point in 2011). But looking
ahead, multifamily construction will continue to accelerate, as permits for
over 310,000 multifamily units were issued in 2012, also the highest level
since 2008.

Source: US Census Bureau, New Residential
Construction.

Gains in permitting have been widespread: three-quarters of
the 100 largest metro areas accelerated their multifamily permitting in 2012. Nationwide,
the multifamily rebound is outpacing improvement in the single-family market. Multifamily
permitting was up over 51 percent between 2011 and 2012, more than twice the
gain in single-family permits and the third consecutive double-digit increase. The
rapid recovery in the multifamily sector has led to speculation that some markets may
be in danger of overbuilding. But while recent gains are dramatic, a
longer-term view of both supply and demand indicates that such concerns are
likely overblown—at least for now.

Current increases in multifamily permitting are from
historically low levels. From a peak of over 473,000 units in 2005, multifamily
permits decreased by more than 70 percent to 142,000 in 2009, the fewest in 25
years. In the context of these drastic swings, permitting is just beginning to
return to levels in line with long-term averages. Nationwide, in 2012, nearly 81,000
fewer multifamily units were permitted than the average annual level from
2000 to 2009. Permitting in 34 of the 100 largest metros did top average levels
from the 2000s in 2012, including seven of the top ten highest permitting areas
(Figure 2).

Source: JCHS tabulations of US Census
Bureau, New Residential Construction.

This boost in supply is occurring in conjunction with
rapidly growing demand for rentals. Nearly 93 percent of multifamily units
completed in 2012 were rentals, the highest level in decades. According to the Housing Vacancy Survey, the
number of renter households increased by over 1.1 million between 2011 and
2012, marking the eighth straight year of renter growth. Rentership was
especially strong in each of the top ten highest permitting areas, where growth
in renter households outpaced overall household growth between 2010 and 2011,
the most recent years with metro-level data available from the American Community Survey. In total, these
ten metros added 154,000 households between 2010 and 2011, but the number of
renter households increased by nearly 268,000.

Additional signs indicate strong rental markets in these highest
permitting areas. According to MPF Research, vacancy rates in
professionally-managed apartment complexes were near or under 5 percent in
eight of these markets as of the fourth quarter of 2012. Monthly rents in the ten
markets were up an average of 3.6 percent in the fourth quarter of 2012 from
the same quarter a year earlier, compared to 3.0 percent nationwide. As
construction timelines for multifamily buildings often span several years, market
conditions will continue to develop during the lag between permitting and
completion of new units. However, generally tight markets and enduring renter growth
suggest that the robust return of multifamily construction currently represents
a response to rising demand, rather than the formation of a new bubble.

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